Doman Building Materials Group Ltd (TSX: DBM), formerly CanWel Building Materials Group Ltd is a wholesale distributor of building materials and home renovation products. It primarily serves new home construction, home renovation, and industrial markets, as well as provides its building products to dealer/lumberyard and home improvement centers.

Why Should Investors Book Profit? 

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, consisting of gross margin, EBITDA margin, operating margin, and net margin, which exhibits the pressure on company.

Source: REFINITIV, Analysis by Kalkine Group

• Rising Loans and borrowings: As on September 30, 2021, the company’s loans and borrowings increased to CAD 682.9 million compared to CAD 209.5 million on December 31, 2020. The higher loans and borrowings were mainly due to an increase in cash consumption by seasonal working capital changes.
• Long cash cycle days: The company’s Cash Cycle (Days) has increased compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. In Q3 2021, its Cash Cycle stood at 113.2 days against 92.6 days in Q2 2021. Also compared to industry median its very high, which is at 65.9 days only.
• Heavily leveraged: The company’s debt to equity ratio at the end of September 30, 2021, stood at 1.69x, which is too high against the industry median of 0.85x. Additionally, its net debt to EBITDA stood at 26.12x against the industry median of 6.54x. These factors imply higher balance sheet risks.
• Exhausted technical indicators: On the daily price chart, the stock has recently experienced a good rally and has moved close to the upper band of the Bollinger band, indicating that the company is possibly overbought and due for a price correction or consolidation. The stock has also re-touched its previous resistance level, which it had attempted but failed to breach. As a result, there's a good chance that prices will consolidate or fall.
  

Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine group

Stock recommendation

In the last financial numbers, the company posted an increased revenue by 32.4% to CAD 625.3 million compared to CAD 472.2 million in the same period in 2020, while its gross profit declined to CAD 80.7 million, compared to CAD 86.8 million, mainly due to decline in construction materials pricing. Moreover, its expenses boiled, which dented its net income also. Furthermore, its margin profile is on the lower end of the industry, indicating that it is under pressure. Also, the group is heavily leveraged, implying higher balance sheet risks. Even the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Hence, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 8.46 on January 20, 2022.

One-Year Technical Price Chart (as on January 20, 2022). Source: REFINITIV, Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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